During the 1970's, the management contract approach to operating
hotels (covering hotel rooms and hotel restaurants) gained widespread acceptance. Today, few national hotel
companies actuallyown the
properties theyoperate. Although the application of management contracts to restaurants is still relatively new, the
fundamentals of the relationship are the same.

Under a management contract, an experienced operator will take over a property
(oftentimes distressed) and attempt to make it profitable. If the operator is able to generate profit, he retains a
percentage of the profits for his efforts. The net proceeds from operations are then passed through to the
owner.

The owner is motivated to accept the management contract relationship for the
following reasons:

If the owner is also a restaurateur, he recognizes the potential for greater
profits - sometimes dramatically higher than he would be able to achieve on his own

He avoids the responsibilities and problems of daily operations

If the owner is not an operator, he recognizes his inability to effectively
hire and direct a manager

His potential return is higher than if he merely leased or subleased the
restaurant to another operator

If the operator improves profits substantially, the resale value of the
restaurant or value of the real estate increases by healthy multiples

The restaurant management company is motivated to perform well for the following
reasons:

The higher the profit generated for the owner, the greater the
reward to the operator

The operator can expand without the need to
raise a large amount of investment capital

Success in providing profits for
the owner reinforces the operator's credibility and ability to
expand

Relationship Between Owner and Operator

Most restaurants have two distinct components:

1. The Operating
Entity which derives revenues and incurs expenses from the
sale of food and beverage, and

2. The Real Estate
Entity which deals with the land, building, improvements
and such related aspects as debt service, property taxes, building insurance and invested equity.

Management contract operators are concerned with the first component and owners
with the second.

Typically, an owner purchases the land, building, furniture, fixtures and
equipment, placing some cash down and financing the balance over a period of time. On a regular basis he pays
interest and principal, property taxes, and premiums for insurance on the building and its contents. From time to
time he makes capital improvements to the restaurant. The owner regards his purchase of the property and the
related expenses of ownership as an investment. As such, he requires a reasonable return on that
investment.

The owner contracts with the operator to run the restaurant business with the
expectation the operator can generate sufficient income from the restaurant to pay the costs of operation, cover
the owner's expenses of owning the property and provide a reasonable return on investment.

Under a management agreement, the owner agrees to provide working capital, bear all
expenses, maintain insurance on the building and contents, and avoid any role in the restaurant operation. Among
other things, the operator agrees to assume proprietary responsibility for management, handle all administrative
functions, handle all cash, pay all bills, develop and execute the marketing plan, design and price the menu, plan
capital improvement needs, select, train and motivate staff, maintain accurate books and records, prepare regular
financial statements and prepare all sales and payroll tax reports.

The essence of the relationship is that the operator is only responsible for those
revenues and expenses which pertain to the actual operation of the restaurant and over which he has control. If the
operator is successful, he will generate income from the operation after management fees which will then flow to
the owner.

Whether or not the income is sufficient to cover the owner's expenses and expected
return on investment is another matter. Obviously, the operator has no control over how much the owner paid for the
property and thus cannot be accountable for the adequacy of the income flow with respect to covering the owner's
real estate investment. It is in the operator's best interests, however, to maximize profitability of the
restaurant which in turn maximizes cash flow to the owner.

Management Fee Formula

Generally, management companies are paid a percentage (2-5%) of gross sales, called
a Basic Management Fee (BMF) plus a percentage of the operating income (15-25%) called an Incentive Management Fee
(IMF). The BMF covers the operators organizational expenses and rewards him for increasing sales. The IMF is the
reward the operator receives for delivering profits to the owner. Typically, IMF accounts for about 60% of the fees
received by a management company.

Pitfalls of Management Contracts

Management contracts can create problems as well as solve them. Listed below are a
number of areas that can be potential causes of dissatisfaction between owners and operators:

owners do not understand the nature of the relationship

owners do not understand the terms of the contract

owners attempt to interfere with the operation

owners hesitate to make needed capital improvements

operators do not perform as well as anticipated

operators pad their expenses to divert assets

operators fail to perform needed maintenance in order to increase short term
profits

operators fail to adequately promote the restaurant in order to increase short
term profits

operators favor one of their operations over another

As might be expected, there are occasionally disagreements between owners and
operators as to what constitutes operating expenses as distinguished from ownership expenses. The best solution
lies in a clearly worded management agreement which addresses these areas in detail and provides appropriate
incentives and safeguards to all parties. Ultimately, of course, the real measure of "workability" in a management
contract is reflected in the level of respect and trust between the owner and operator.

Profile of the Successful Operator

The restaurant operator who succeeds in generating a stable, consistently
profitable operation generally shows the following characteristics:

is passionately and single-mindedly focused on guest service

thoroughly understands the aspects of the retail, manufacturing and service
industries

has a significant vision, depth of knowledge and technical
competence

demands tight controls and sound accounting practices

requires daily information to keep on top of the operation

responds with appropriate action in a timely manner

knows how to develop and implement restaurant marketing plans

is effective in the complex areas of staff training, productivity and
motivation

takes a real delight in the professional development of the restaurant's
staff

has high standards of quality and performance

is able to deal effectively with a wide variety of unexpected
challenges

is profit-oriented and willing to spend money to make money

maintains a perspective on the operation, its place within the market and its
potential for improvement